Puerto Rico draft rescue bill guided by U.S. bankruptcy rules

WASHINGTON/SAN JUAN (Reuters) - A U.S. congressional draft bill to steer Puerto Rico through its economic crisis was released on Tuesday with elements of U.S. bankruptcy law opposed by creditors who want to keep the island's debt talks out of court.

The draft, circulated by the U.S. House of Representatives Committee on Natural Resources, includes sections of the U.S. Bankruptcy Code that allow bankrupt entities under certain circumstances to force creditors to take reduced payouts.

An official draft of the bill is expected to be released on April 11 after a public comment period.

Puerto Rico has $70 billion in debt, with major bond payments due in coming months. It also has an unfunded state pension liability of nearly $44 billion.

The bill "provides Puerto Rico with tools to impose discipline over its finances, meet its obligations and restore confidence in its institutions," Utah Republican Rob Bishop, the committee's chairman, said in a statement.

The Republican-led panel's bill would create a federal board to oversee the island's finances, monitor its accounting and help curb spending. It would also require Puerto Rico to make efforts to restructure debt consensually with creditors.

If those talks failed, the island or its public entities could file for a court-supervised debt restructuring process based on key statutes within U.S. bankruptcy law. That would allow Puerto Rico to force such deals on holdout creditors.

The bill's elements were unexpected because creditors and House Republicans had largely opposed bankruptcy for Puerto Rico.

The Natural Resources Committee had said that "retroactively adding territories" like Puerto Rico to the federal bankruptcy code "is ill-conceived and would undermine the rule of law."

A congressional aide stressed that the draft legislation was not a bankruptcy law, and does not directly add Puerto Rico to U.S. bankruptcy code, though it follows similar language.

The Obama Administration has advocated to allow Puerto Rico to restructure its debt in a court-sanctioned process.

House Minority Leader Nancy Pelosi criticized the "sweeping powers of the oversight board proposed" in the bill.

The bill in its final form may include language that protects an existing consensual restructuring deal between creditors and the power utility, PREPA, the congressional aide said. PREPA earlier this year reached the deal with creditors holding roughly 70 percent of its $8.3 billion in debt.

"The bill in its current form is fiscally irresponsible," financial adviser Stephen Spencer of Houlihan Lokey said in an emailed statement. The company's clients include major Puerto Rico creditors such as OppenheimerFunds and Franklin Advisers.

"As we showed with the PREPA deal, fair solutions can be reached between Puerto Rico and its creditors that benefit all stakeholders. However, the Discussion Draft Bill is worse for creditors than Chapter 9," Spencer said.

How the oversight board treats the island's General Obligation bonds, which is typically regarded as the most senior debt, versus pension payments is also a source of concern for creditors.

The oversight board will look at each bond issued and make a determination on how it relates to other creditors under the existing law, the congressional aide said. If the GO bonds are constitutionally protected and within their limits then the board would take that into consideration, the aide said.

(Reporting by Patrick Rucker in Washington and Nick Brown in San Juan; Editing by Daniel Bases and Richard Chang)